Operations

Management
Supplement 7 –
Capacity Planning

PowerPoint presentation to accompany

Heizer/Render
Principles of Operations Management, 7e
Operations Management, 9e
© 2008 Prentice Hall, Inc. S7 – 1
 Bakery Example
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

© 2008 Prentice Hall, Inc. S7 – 2

 Bakery Example
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 shifts - 8 hours

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

© 2008 Prentice Hall, Inc. S7 – 3

 Bakery Example
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Utilization = 148,000/201,600 = 73.4%

© 2008 Prentice Hall, Inc. S7 – 4

 Bakery Example
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Utilization = 148,000/201,600 = 73.4%

© 2008 Prentice Hall, Inc. S7 – 5

 Bakery Example
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Utilization = 148,000/201,600 = 73.4%

Efficiency = 148,000/175,000 = 84.6%

© 2008 Prentice Hall, Inc. S7 – 6

 Bakery Example
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Utilization = 148,000/201,600 = 73.4%

Efficiency = 148,000/175,000 = 84.6%

© 2008 Prentice Hall, Inc. S7 – 7

 Bakery Example
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts
Efficiency = 84.6%
Efficiency of new line = 75%

Expected Output = (Effective Capacity)(Efficiency)

= (175,000)(.75) = 131,250 rolls

© 2008 Prentice Hall, Inc. S7 – 8

 Bakery Example
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts
Efficiency = 84.6%
Efficiency of new line = 75%

Expected Output = (Effective Capacity)(Efficiency)

= (175,000)(.75) = 131,250 rolls

© 2008 Prentice Hall, Inc. S7 – 9

 Complementary Demand
Patterns

4,000 –
Sales in units

3,000 –

2,000 –

1,000 – Jet ski

engine
sales

JFMAMJJASONDJFMAMJJASONDJ
Time (months)
Figure S7.3

© 2008 Prentice Hall, Inc. S7 – 11

 Complementary Demand
Patterns

4,000 –
Sales in units

Snowmobile
3,000 – motor sales

2,000 –

1,000 – Jet ski

engine
sales

JFMAMJJASONDJFMAMJJASONDJ
Time (months)
Figure S7.3

© 2008 Prentice Hall, Inc. S7 – 12

 Complementary Demand
Patterns
Combining both
demand patterns
reduces the
variation
4,000 –
Sales in units

Snowmobile
3,000 – motor sales

2,000 –

1,000 – Jet ski

engine
sales

JFMAMJJASONDJFMAMJJASONDJ
Time (months)
Figure S7.3

© 2008 Prentice Hall, Inc. S7 – 13

 Approaches to Capacity
Expansion
(a) Leading demand with (b) Leading demand with
incremental expansion one-step expansion
New New
capacity capacity

Demand
Demand

Expected Expected
demand demand

(c) Capacity lags demand with (d) Attempts to have an average

incremental expansion capacity with incremental
New
expansion
capacity New
Demand
Demand

Expected capacity Expected

demand demand

Figure S7.5
© 2008 Prentice Hall, Inc. S7 – 14
 Approaches to Capacity
Expansion
(a) Leading demand with incremental
expansion

New
capacity
Demand

Expected
demand

1 2 3
Time (years)
Figure S7.5
© 2008 Prentice Hall, Inc. S7 – 15
 Approaches to Capacity
Expansion
(b) Leading demand with one-step
expansion

New
capacity
Expected
Demand

demand

1 2 3
Time (years)
Figure S7.5
© 2008 Prentice Hall, Inc. S7 – 16
 Approaches to Capacity
Expansion
(c) Capacity lags demand with incremental
expansion

New
capacity

Expected
Demand

demand

1 2 3
Time (years)
Figure S7.5
© 2008 Prentice Hall, Inc. S7 – 17
 Approaches to Capacity
Expansion
(d) Attempts to have an average capacity
with incremental expansion

New
capacity
Demand

Expected
demand

1 2 3
Time (years)
Figure S7.5
© 2008 Prentice Hall, Inc. S7 – 18
 Break-Even Analysis

 Objective is to find the point in

dollars and units at which cost
equals revenue
 Requires estimation of fixed costs,
variable costs, and revenue

© 2008 Prentice Hall, Inc. S7 – 19

 Break-Even Analysis
 Fixed costs are costs that continue
even if no units are produced
 Depreciation, taxes, debt, mortgage
payments, rent, salaries
 Variable costs are costs that vary
with the volume of units produced
 Labor hourly wages, materials,
portion of utilities
 Contribution (markup) is the
difference between selling price and
© 2008 Prentice Hall, Inc. S7 – 20
 Break-Even Analysis
Assumptions
 Costs and revenue are linear
functions
 Generally not the case in the real
world

© 2008 Prentice Hall, Inc. S7 – 21

 Break-Even Analysis
–
Total revenue line
900 –

800 –
Break-even point Total cost line
700 – Total cost = Total revenue
Cost in dollars

600 –

500 –

400 – Variable cost

300 –

200 –

100 – Fixed cost

–
| | | | | | | | | | | |
0 100 200 300 400 500 600 700 800 900 1000 1100
Figure S7.6
Volume (units per period)
© 2008 Prentice Hall, Inc. S7 – 22
 Break-Even Analysis
BEPx = break-even point in x = number of units
units produced
BEP$ = break-even point in TR = total revenue = Px
dollars F = fixed costs
P = price per unit (after V = variable cost per unit
all discounts) TC = total costs = F + Vx

Break-even point
occurs when

TR = TC F
or BEPx =
P-V
Px = F + Vx

© 2008 Prentice Hall, Inc. S7 – 23

 Break-Even Analysis
BEPx = break-even point in x = number of units
units produced
BEP$ = break-even point in TR = total revenue = Px
dollars F = fixed costs
P = price per unit (after V = variable cost per unit
all discounts) TC = total costs = F + Vx

BEP$ = BEPx P
= F P Profit = TR - TC
P-V = Px - (F + Vx)
= F
= Px - F - Vx
(P - V)/P
F = (P - V)x - F
=
1 - V/P
© 2008 Prentice Hall, Inc. S7 – 24
 Break-Even Example
Fixed costs = $10,000 Material = $.75/unit
Direct labor = $1.50/unit Selling price = $4.00 per unit

F $10,000
BEP$ = =
1 - (V/P) 1 - [(1.50 + .75)/(4.00)]

© 2008 Prentice Hall, Inc. S7 – 25

 Break-Even Example
Fixed costs = $10,000 Material = $.75/unit
Direct labor = $1.50/unit Selling price = $4.00 per unit

F $10,000
BEP$ = =
1 - (V/P) 1 - [(1.50 + .75)/(4.00)]
$10,000
= = $22,857.14
.4375

F $10,000
BEPx = = = 5,714
P-V 4.00 - (1.50 + .75)

© 2008 Prentice Hall, Inc. S7 – 26

 Break-Even Example
50,000 –

Revenue
40,000 –
Break-even
point Total
30,000 –
Dollars

costs

20,000 –

Fixed costs
10,000 –

–
| | | | | |
0 2,000 4,000 6,000 8,000 10,000
Units

© 2008 Prentice Hall, Inc. S7 – 27

 Break-Even Example
Multiproduct Case
F
BEP$ =
∑ 1-
Vi
Pi
x (Wi)

where V = variable cost per unit

P = price per unit
F = fixed costs
W = percent each product is of total dollar sales
i = each product

© 2008 Prentice Hall, Inc. S7 – 28

 Multiproduct Example
Fixed costs = $3,500 per month
Annual Forecasted
Item Price Cost Sales Units
Sandwich $2.95 $1.25 7,000
Soft drink .80 .30 7,000
Baked potato 1.55 .47 5,000
Tea .75 .25 5,000
Salad bar 2.85 1.00 3,000

© 2008 Prentice Hall, Inc. S7 – 29

 Multiproduct Example
Fixed costs = $3,500 per month
Annual Forecasted
Item Price Cost Sales Units
Sandwich $2.95 $1.25 7,000
Soft drink .80 .30 7,000
Baked potato 1.55 .47 Annual 5,000 Weighted
Tea Selling Variable .75 .25Forecasted 5,000
% of Contribution
Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7)
Salad bar 2.85 1.00 3,000
Sandwich $2.95 $1.25 .42 .58 $20,650 .446 .259
Soft drink .80 .30 .38 .62 5,600 .121 .075
Baked 1.55 .47 .30 .70 7,750 .167 .117
potato
Tea .75 .25 .33 .67 3,750 .081 .054
Salad bar 2.85 1.00 .35 .65 8,550 .185 .120
$46,300 1.000 .625

© 2008 Prentice Hall, Inc. S7 – 30

 Multiproduct
BEP Example
= $
F

∑ 1 - P x (W )
V i

i
i

Fixed costs = $3,500 per month

$3,500
Annualx Forecasted
12
= = $67,200
Item Price Cost .625
Sales Units
Sandwich $2.95 $1.25 7,000
Soft drink .80 Daily
.30 $67,200
7,000
sales = = $215.38
Baked potato 1.55 312 days
.47 Annual 5,000 Weighted
Tea Selling Variable .75 .25Forecasted 5,000
% of Contribution
Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7)
Salad bar 2.85 1.00
.446 x $215.38 3,000
Sandwich $2.95 $1.25 .42 .58 $20,650 = 32.6  .259
.446 33
$2.95 sandwiches
Soft drink .80 .30 .38 .62 5,600 .121 .075
Baked 1.55 .47 .30 .70 7,750 .167 per day
.117
potato
Tea .75 .25 .33 .67 3,750 .081 .054
Salad bar 2.85 1.00 .35 .65 8,550 .185 .120
$46,300 1.000 .625

© 2008 Prentice Hall, Inc. S7 – 31

 Decision Trees and
Capacity Decision
Market favorable (.4)
$100,000

Market unfavorable (.6)

-$90,000

Market favorable (.4)

$60,000
Medium plant
Market unfavorable (.6)
-$10,000

Market favorable (.4)

$40,000

Market unfavorable (.6)

-$5,000

$0
© 2008 Prentice Hall, Inc. S7 – 32
 Decision Trees and
Capacity Decision
Market favorable (.4)
$100,000

Market unfavorable (.6)

-$90,000

Market favorable (.4)

$60,000
Medium plant
Large Plant Market unfavorable (.6)
-$10,000

EMV = (.4)($100,000) Market favorable (.4)

+ (.6)(-$90,000) $40,000

Market unfavorable (.6)

EMV = -$14,000 -$5,000

$0
© 2008 Prentice Hall, Inc. S7 – 33
 Decision Trees and
Capacity Decision
-$14,000
Market favorable (.4)
$100,000

Market unfavorable (.6)

-$90,000
$18,000
Market favorable (.4)
$60,000
Medium plant
Market unfavorable (.6)
-$10,000
$13,000
Market favorable (.4)
$40,000

Market unfavorable (.6)

-$5,000

$0
© 2008 Prentice Hall, Inc. S7 – 34